Investing in Japan has been very lucrative this year. ‘Abenomics’ – a reformative initiative introduced by the Prime Minister Shinzo Abe early this year is largely the reason for this boost in optimism.
The Bank of Japan follows a policy to increase Japan’s monetary base at an annual run of about 60–70 trillion yen. This injection of liquidity will continue until the inflation target reaches 2%.
This bond buying kept a lid on Japan Government bonds rates for the near term, but according to BOJ Governor Kuroda, interest rates will likely take an upturn once BOJ attains 2% inflation target and stops buying bonds.
The inflation rate in Japan was recorded at 1.10% in October 2013 which showed a steady improvement since May when it recorded a deflationary rate of 0.3%. Amid such a backdrop, WisdomTree has brought a new Japan-based investment option – WisdomTree Japan Interest Rate Strategy Fund JGBB – to benefit from potential interest rate changes in Japan and a weakening of yen.
JGBB in Focus
This newly launched fund looks to track the WisdomTree Japan Interest Rate Strategy Index. The Index consists of long positions in the U.S. treasury bills having a remaining maturity of greater than one month and less than three months and short positions in JGB (maturing 5 to 10 years) futures contracts thus providing exposure to changes in Japanese interest rates (read: 3 Covered Call ETFs to Pump Up Your Income).
As far as asset allocation goes, the fund has 76.58% exposure in Japanese rates and 23.42% Japanese currency contracts. US treasuries get 99.05% asset allocation. The fund charges 50 bps in annual fees.
How Does it Fit in the Portfolio?
As far as short-term bonds are concerned, these offer less vulnerability to interest rate fluctuations. As of December 20, 1-month treasury yield was 0.02% while the 3-month treasury yield was at 0.07%. These rates were unchanged from before the beginning of the taper talk.